In Lesson 2, we looked at investment decisions for assets held in isolation. That is, we did not consider the synergistic effects of assets held together. This will, however, be considered in this lesson.
A portfolio is a combination of assets held by the investor for investment purposes. Portfolio theory therefore attempts to show an investor how to combine a set of assets to maximise the assets' returns as well as minimise the assets' risk (Risk Diversification).
Diversification is defined as combining assets whose returns are not perfectly positively correlated to reduce the aggregate risk of the total asset holdings (or the portfolio).